Three Hotel Acquisition Tips

2misi.com

http://www.2misi.com/article/2012/07/three-hotel-acquisition-tips

Buying a hotel can be a complicated process, even with previous experience owning and running an establishment. The business for sale marketplace is very dynamic and each hotel is so unique that both pros and novices alike must do extensive research and preparation before diving into a deal.

With the following three tips as starting points, buyers can be sure to find out what they need to know to get well on their way to owning the hotel of their dreams.

Understand Your Parameters

One of the biggest mistakes people made when purchasing a business is not having a solid grasp on how it will affect their lives. It's not uncommon for hotel buyers to get so excited by the prospect of owning a new business that they rush into it without asking themselves some very important questions, such as:

Will owning this business lead to a lifestyle that made me happy?

It's no secret that owning a hotel can be a lot of work, but still, many buyers aren't aware of just how life changing and time consuming it can be. First time buyers might have an unrealistic view of what a hotel owner needs to put into the business, believing the staff will be able to do most of what it takes to keep things running smoothly and profitably. Then, when they find themselves doing tasks they never thought they'd have to do, they might become disillusioned and overwhelmed, jeopardizing their health and the health of the business.

Do the financials make sense?

For one, buyers need to make sure they'll be able to secure a loan to buy the hotel, and that they are confident the cash flow from the purchase will be able to cover the loan payments. One essential consideration is whether or not the seller of the hotel is willing to finance part of the sale. If not, it can be extremely difficult to obtain a sufficient loan, and learning about this issue later rather than sooner will just lead to unnecessary headaches.

Even if a buyer determines that accessing a loan won't be a problem, there's still the issue of whether or not cash flow from the business will be adequate to support the type of lifestyle desired. This is why it's so important to make sure to get accurate, detailed financial reports from the seller, and to come up with a solid estimate of how much money is required each month to live a secure, satisfying life.

In addition to basic financials, buyers should be sure to check fundamental business metrics such as the occupancy rate of the hotel, as well as room rates. To put the business fundamentals in better perspective, potential buyers should investigate the room rates at nearby hotels for comparison. If possible, interested buyers should also stay at the hotel as a guest for a few days before approaching the seller to get a first hand look at hotel operations, customer satisfaction, and occupancy rates. All of this takes a lot of time, but it's essential. Buyers are much better off putting the effort in before taking the plunge into a purchase than after they are already tied to the business.

Get Familiar with the Market

It's more likely that a hotel purchase can go wrong if a buyer doesn't have a thorough understanding of the market both locally and nationally, including a list of all possible properties that meet buying criteria and knowledge of business for sale trends and cash flow and revenue multiples.

Negotiate with Patience

Negotiation is an essential part of any business for sale transaction, but one that is too often underutilized by business buyers.

Businesses typically sell for 10-20% less than a seller's initial selling price, so there is no need for a buyer to be shy when it comes to asking for a lower price. It's likely the seller won't jump at the initial offer, so in this case patience is key. Buyers shouldn't budge significantly on their offers, but at the same time they should not be rigid to the point of forcing sellers to turn elsewhere. In addition, buyers need to ensure the seller will allow them to retain key employees and supplier relationships once they take over, and confirm precisely what level of training, advice and oversight the previous owner will provide after the transition. As such, the negotiation process can take a while, but it typically pays off in the end.

During the negotiation process, though, sometimes deals fall through. It's bound to happen. For this reason, buyers should avoid becoming too attached to a single hotel. If they do, they'll likely be devastated when a transaction doesn't work out, and be left without a "plan B." Instead, they should keep a running list of "key properties" that they frequently revisit throughout the process and can turn to if their top choice deal fails to pan out.